The US parts market is recovering faster than the Canadian market … actually, it looks like Canada didn’t get hit quite so hard last year, so there was less room for a rebound. But, Canadian trends still seem a little… bleh.
Overall US parts and accessory sales are still gaining momentum. For some OEMs it will be in the double digits – growth in the same ballpark as year-over-year vehicles sales. Selling a lot of new cars and trucks does not automatically mean that you will sell a lot more maintenance and repair parts for your older vehicle parc. Certainly, accessory sales derive from vehicle sales, but this typically accounts for only 15% or so of the sales total. So, the overall parts sales growth is a result of more things going right with the economy and personal expenditure spending.
Accessory sales are leading the charge across the entire North American market and have been doing quite well in this recovering whole-goods (vehicle) sales market. Double digit accessory-greedy light truck sales growth is a major contributor here. Overall parts sales gains for the OEMs are generally more robust than the IAM, mostly due to spectacular accessory sales.
Collision is growing, as forecasted, based on a reversal of some fundamentals that took place last year (lower speeds to get higher mpg, delayed repair, pocketed insurance checks) and some recovery in miles travelled. This is a curious and controversial segment. LKQ’s organic growth in the third quarter was 8.2%, and there does not seem to be any “organic” momentum building through their current fiscal year. Yet, we do see some growth momentum at the OEMs. My guess is that some cash has freed up at retailers and they are building some inventory for the winter season – the “bullwhip” effect I talked about in previous blogs. This “recovery” contravenes some common industry thinking that postulates that retailers are sticking with their recessionary thinner inventories and relying more on the OEM’s hyper-fast order response times. Occam’s Razor tells us to select the competing hypothesis with the fewest new assumptions. Retailers building winter collision inventories in a recessionary recovery period certainly has zero new assumptions.
Timeout: The bullwhip effect is all about demand magnification throughout the supply chain, caused by a series of independent (and somewhat myopic) reactions of value-chain partners buying inventory in reaction to sales events. As we recover from last year’s recession, consumers will start to buy more … from severely depleted value-chain inventories. Delayed maintenance and repair will transition to upticks in dealer businesses, and independent installer business. Who gets what depends on who has what. The surviving retailers out there will have to compete for this uptick in demand and will want to replenish their inventories, both for what is selling and what they think might sell. Distributors will respond to this with orders on their suppliers. How will they react? They will react from the same nexus of fear … fear that they will lose sales and, worse yet, customer purchase loyalty. So, they, too, will have to replenish (probably over-replenish) for what is selling and what their wizards think will sell. And so on as we move along the supply chain. MIT and others have studied this to death. Bottom line is that a link chain of these sorts of reactions will rebuild inventories and enterprise sales … far beyond what actual demand might be. Just as we all were slaves to the Keynesian Paradox of Thrift in 2009, we will be slaves to 2010’s bullwhip. But the big questions are not only how loud the crack will be, but also, who will get cracked?
M&R sales gains are solid and seem to be more programmatically driven than reflective of a common wave of consumer fix-it-up behaviors.
Domestic powertrain is doing quite well (not much more room for disappointments here – so, from the bottom everything looks up). The Importers have not quite figured out how to sustain growth here- YTD numbers are good, but there’s a lot of month-to-month variability.
Tire sales are increasing. Yet, it seems that we’ve lost some momentum here in the market – Goodyear’s North American overall tire sales seem to be pretty strong.
Bottom Line: The service parts market is in recovery, the IAM has not launched a secret market share stealing weapon, and, due to 2009 cutbacks and capacity tightening, the OEMs are all under-realizing the potential of these market conditions. That is the unintended consequence of conservative forecasting. Hundreds of millions of dollars have been left on the table.